Mexico Hikes Wages, Adjusts Prices, Cuts Spending to Counter Inflation

The Mexican government on Tuesday announced an anti-inflation package, including a temporary price freeze on public sector goods and services and cuts in public spending.

The measures came in a so-called Pact of Economic Solidarity, signed by President Miguel de la Madrid, members of the cabinet and leaders of union, farmworker and business sectors.

“These measures are strong, bitter and painful, implying sacrifices and efforts for everyone,” De la Madrid said.

The measures followed a sharp rise in inflation, which ran at a record annual rate of 125.8% through November, and a government order devaluing the controlled peso, used for most foreign exchange transactions, by 22%.

The announcement came after agreement with business and unions on a two-stage wage increase that would immediately raise the salaries of millions of Mexican workers by 15%, heading off a general strike threatened just before Christmas. On Jan. 1, the minimum wage will rise another 20%.

From the beginning of March, wages will be increased monthly in accordance with the prices of a basket of goods that will be defined over the next 15 days. From March onward, prices will be adjusted according to a formula based on monthly inflation.

Starting today, however, the government said it would adjust prices of public sector goods and services to compensate for insufficient increases over the past seven months. Prices will then be frozen in January and February.

The anti-inflation plan also includes proposals to cut budgeted 1988 spending to 20.5% of gross domestic product from 22%. This will involve straight spending cuts and a reduction in subsidies.

The spending cuts are expected to increase the primary fiscal surplus, which does not include interest payments on domestic debt, to 8.3% in 1988 from the 5.4% originally projected.

The government also sliced the maximum level of duties on imported goods to 20% from 40% to hold the cost of imports at current levels after the devaluation.

The emergency pay increase will be the fifth boost in the minimum wage this year, an indication of the effect spiraling inflation is having on the beleaguered economy.

Private analysts predicted that the final rise in consumer prices for the year could be as high as 150%. The inflation rate last year was a record 105.7%.

The government’s new economic plan, analysts said, will include price increases in some public sector goods, such as gasoline.

“The objective,” said a knowledgeable financial analyst, “is to try to keep the lid on price increases and wage increases to try to get a better handle on (inflation).”

Labor leader Fidel Velazquez had said Monday that the government’s wage proposal included a commitment to boost future wages and prices at the same pace.

The financial analyst, who spoke on condition of anonymity, said such a twinning of wages and prices would represent “an informal indexation.” He added, “They are going to try to keep things moving together at a slower rate” as a way of controlling inflation.

The first step of the plan came Monday when the Bank of Mexico, the nation’s central bank, devalued the controlled rate of the peso from to 2,200 pesos to the U.S. dollar to about 1,800 to the dollar.

The controlled rate is used in 75% of all commercial transactions. The other rate, known as the free rate, is used in tourism and most transactions along the U.S. border.